Dear Subscribers,
The Briefings Newsletter returns after a break over last weekend for the Queen’s funeral. There’s a lot of news to catch up on, and we’ll try and give a broad overview.
First is the new mini-budget from Chancellor Kwasi Kwarteng. A balanced assessment from the National Institute of Economic and Social Research suggests that it will reduce the length of the recession and give some help to poorer households, but will increase the size of the public debt and probably force the Bank of England to raise interest rates more aggressively.
We have more on that in Key Points below and our co-editor economist Graham Gudgin will write further on this in coming days. Our general view mirrors that of most economic commentators. It is difficult to see how the measures announced by the Chancellor will achieve his ambition to raise the growth rate of the UK to 2.5% per annum.
Budget-Lite
We are somewhat concerned that Liz Truss seems to be willing to compromise with the EU on Northern Irish issues, and negotiations are likely to restart soon. The mini-budget did not extend VAT cuts to Northern Ireland, which remains tied to EU rates with deleterious constitutional consequences. The government has also attempted to reopen negotiations over joining Horizon Europe – though these are likely to remain stalled while Brussels can use membership as a pressure tool for Northern Ireland.
Truss is also reportedly considering giving in to pressure to align with Brussels over food standards (one of the EU’s red lines). This may make a Protocol deal easier, but will make a meaningful trade deal with the US (and others) very difficult. In nudging Britain closer to the Single Market, and making deals with others harder, our concern is that it makes it harder to secure Brexit through regulatory divergence.
Finally in UK news, the government has decided to legalise shale gas extraction (fracking). This will ease the UK’s dependence on foreign gas, and is greener given that the LNG currently consumed needs to be shipped from abroad. Moreover, as Jacob Rees-Mogg pointed out in the House of Commons, it has been confirmed from several sources that opposition to fracking was funded and encouraged from Russia, which sought to bring Europe into energy dependence.
Fracking somewhere rainier
Outside the UK, however, events have been even more significant. Russia has launched a partial mobilisation – sources say that up to one million men may be being conscripted, despite the government’s pretence that this merely affects reservists. Though weight of numbers may make a difference eventually, it will take months before these men are remotely ready to go into action – and even then Russian equipment, logistics, leadership and co-ordination remain appalling.
Russia’s influence in the wider region is eroding. In the Caucuses, Azerbaijan has attacked Armenia again – a conflict which Russia has previously tried to contain. Long a Russian ally, Kazakstan has criticised Putin’s war and cracked down on Russian truckers using the country to dodge sanctions. Georgia and the other Central Asian Republics could also seize the chance to distance themselves from Moscow.
Sunset on Putin’s imperial dreams?
Finally, Italians go to the polls today. The once-fascist, now Eurosceptic Brothers of Italy Party are likely to receive the most votes, drawing veiled threats from Commission President Ursula von der Leyen. The Commission has also launched a number of major initiatives to standardise markets in electricity usage, media, and other areas – which have provoked criticism of overreach.
Media
Co-editor Graham Gudgin wrote for policy exchange on the new Northern Ireland Census results which show for the first time that Catholics outnumber Protestants. He explains why this is not likely to lead to a border poll on Irish unity.
Our other Co-Editor Robert Tombs wrote for Die Zeit on the late Queen’s legacy, and covered her funeral for the Daily Telegraph on Monday.
Blogs
VAT: an EU souvenir we should dump, by Catherine McBride
While many people are advising the new Prime Minister to cut income taxes or reduce Value Added Tax (VAT) across the board, Catherine McBride suggests a subtler approach now that VAT, a tax designed to unify and fund the EU, is no longer mandatory in the UK.
“What better Brexit dividend could Prime Minister Truss possibly give the UK than to abolish VAT on fuel and energy? With one blow she would give UK consumers’ spending power a boost while simultaneously putting some clear water between UK and EU taxes.”
UKRAINE ROUND UP 12, by Adrian Hill
From now onward the pace increases, partly to hamper Putin’s schemes for pseudo referendums but also because after a hot summer there may come a very wet winter. That could bring lots of mud then snow on the steppes.
“The counter-offensive towards Kherson is not a feint: Ukraine has committed far too much fighting power for that, but with strong nerves and daring took advantage of a situation the Russians themselves foolishly opened up by delaying crucial decisions.”
Key Points – How is Britain’s comparative fiscal position?
The UK certainly faces economic challenges – but these should not be exaggerated compared to those elsewhere.
Readers will doubtless have seen much criticism of Chancellor Kwasi Kwarteng’s mini-budget, which was announced on Wednesday. Many opponents of the new government have switched from worrying about domestic and small business energy bills to decrying government stimulus by reducing taxation as unaffordable and inflationary – despite the fact that both measures have similar broad macroeconomic effects.
Combined with a Bank of England announcement that the country is in recession as it raised rates 2.25% this week, the news has led many to suggest that the UK is uniquely ill-placed to bring in these measures compared to the rest of Europe, adducing (as ever) Brexit as a likely cause.
Some of these criticisms of inflationary policy may well be legitimate. Judging by recent price trends, markets are concerned by the government’s promises of debt-funded spending via tax cuts and energy subsidies. But this has little to do with Brexit, and neglects several important indicators. While 10-year UK bond yields are indeed higher than those in much of Europe, they still sit below or around the level of US, Australian, and New Zealand equivalents.
The difference between UK, French and German yields has also narrowed over the previous year or so, with the UK rate only diverging upwards again recently. Notably, looking at historic bond yields Brexit itself seems to have had very little effect on the UK’s perceived creditworthiness.
Much of that recent increase probably reflects the comparatively higher inflation seen in the UK over the past year. Yet that gap is narrowing – UK Consumer Price Inflation is reported to have edged down to 9.9% in August, compared to a rise to 9.1% in the Euro Area. The UK’s debt to GDP ratio, meanwhile, is substantially healthier than many European countries, potentially giving it more fiscal room to manoeuvre. It is also unlikely that the UK faces a currency crisis, as economist Paul Krugman (otherwise a critic of the budget) suggests.
While the UK may well now be in recession, that too is a more common feature of the global economic scene. France, The Netherlands, Italy and other European economies are projected to slip into recession over the autumn–winter period of 2022–2023. Like the UK, the ECB has also been forced to hike interest rates in response to recent energy price spikes.
The economic situation is certainly parlous, and the distraction of a prime ministerial leadership race through the summer can hardly have helped matters. Yet this exercise suggests that doom-mongers need to put the UK in perspective – as we at Briefings frequently argue.
We are also on Twitter, posting articles and retweeting the daily events that bring Brexit to the fore in the national news.
Discussion also continues over on Facebook.
How you can help
There is much about Britain’s relationship with Europe that remains to be decided. Our MPs listen to their constituents. Do continue to send them links to our articles, especially on matters relevant to your constituency – for example, in rural areas, articles on the threat to British agriculture. Alternatively, make an appointment to speak to them at their next surgery. Let them know what you want post-Brexit Britain to look like.
As Boris Johnson said in in his post-election address, it is also time for unity and reconciliation. Keep reading our posts and share links to our quality content to help others understand how leaving the EU benefits the UK economy and our own democratic governance. We aim to educate our critics to think differently and more positively about the long-term impact of Brexit.
You can follow us on Facebook and Twitter.
Yours Sincerely,
Newsletter Editor
A Cambridge PhD Student
Economist, Centre for Business Research, Judge Business School University of Cambridge
Emeritus Professor of French History, University of Cambridge
